A Foolish Take: Apparel Stocks Face Tough Headwinds in 2017

By Leo Sun Markets Fool.com

You've probably noticed that many apparel retailers are dumping their merchandise at steep discounts, shuttering their stores, or simply disappearing. Several major retailers -- including Aeropostale, The Limited, and American Apparel -- all filed for bankruptcy over the past year.

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To understand what happened, let's look at the comparable-store sales (or "comps") growth of several major apparel retailers in 2016. Comps growth measures the year-over-year sales growth of stores open for at least year, which gives us an idea of how well their maturing stores are holding up.

Data source: Company quarterly reports. Chart by author.

As this chart illustrates, many apparel retailers are struggling to post single-digit comps growth. This is mainly attributed to two key factors. First, fast-fashion retailers like H&M, Zara, and Forever 21 are rotating their products faster and selling them at lower price tags. Second, stiff competition from e-tailers is causing mall traffic to plummet.

Apparel retailers are trying to counter those declines by closing stores, mimicking fast-fashion strategies like rapid product rotation and analytics-driven design choices, and investing heavily in e-commerce channels. Several companies are also expanding smaller growth brands, like American Eagle Outfitters' (NYSE: AEO) Aerie and Tailgate, to offset weaker growth at their older core brands.

Many apparel stocks now have low valuations and high dividend yields due to the industrywide sell-off, but investors should exercise caution. This industry will likely remain a perilous minefield until more weak players are driven from the market.

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Leo Sun owns shares of American Eagle Outfitters. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.